Journey to the top of the steps
|January 24th, 2014, 05:07 PM||#1 (permalink)|
Futures Experience: Intermediate
Favorite Futures: ES, GC, NQ, FDAX, YM
Posts: 12 since Feb 2013
Thanks: 0 given, 24 received
Journey to the top of the steps
So I keep getting reminded that I've not made my first post, now 338 days. I guess I should start.
This journal will chronicle my journey from long time obsessive observing and theorising to being a cash money billionaire. Hopefully this will be a cathartic experience for myself too.
Dream big or go home.......
The next few paragraphs will be a little history about me, so skip down for the trading stuff.
I started off in trading about 11 years ago when I was just 18 and spent a few thousand hours looking at charts trying to solve the markets before heading off to uni. It's quite funny because looking back I knew so little but had one of the most read threads on trade2win with 5 star rating. I was even asked to write articles for the site which shows how little the majority of people actually understand about trading because I knew relatively little myself and was just a kid.
This was the thread for those interested:
Throughout my 20's life, playing poker semi professionally, and chronic disease put the brakes on my trading career until about 2 years ago when I finally sorted myself out. I spent most of my late 20's trying to cure my Crohn's disease, spending thousands of my money made through playing and teaching poker in the process.
Researching and self testing for thousands of hours, ways to cure an incurable disease has given me a great foundation for the study of the markets, and made me realise that with enough hard work you can achieve things you never dreamt possible. I also did a degree in Economics which I initially intended to use to get a job at an investment bank.
Luckily I now have the disease under control and have held down a job as an auditor for the past couple of years - working to fund my studying for a career in trading. I'm happy that I have a severe incurable disease in many ways as it has given me lots of time alone to think, reflect, and hopefully grow as a person to the point where I can do great things. I no longer play poker as it was always meant to be a short term thing to save for a trading account - short term ended up lasting about 6 years however, and the money went elsewhere. I never enjoyed the gambling aspect of poker and much preferred teaching theory to students, which also paid okay back in the day.
The trading stuff:
Luckily I realised back in 2003 that all the smartest traders seemed to say indicators only show a delayed fuzzy view of what price alone can show you, so I ditched them pretty quickly.
I would say I'm 99% self taught by just looking at charts and making my own conclusions and theories. All I use is a price chart with volume. I spend about 60 hours a week looking at charts and back testing on top of my full time job. I've been profitable trading a small account but have never been happy knowing that my strategy could be better if I could reach that elusive 10,000 hour mark Malcolm talks about back-testing.
My method for the past couple of years that has led to the most "Aha" moments has been:
Observe, theorise, strategize, back test, reach an obstacle, repeat.
I've probably made more notes on trading strategy than I have written about everything else combined in my entire life - I'm very patient and could have mild undiagnosed autism, which I view as an asset for screen trading.
During my back testing I have been unable to accept being happy with any strategy that has any losses. I know that sounds crazy but it works for me.
As soon as I come across a loss in my back test I will spend hours, days, sometimes weeks trying to find why the loss happened. When I find the reason for that particular price action not working compared to all the previous entries up to that point I start again right at the beginning and theorise how I can work the information into my strategy.
So here I am thousands of hours later and the number of Aha moments in the past few months has been increasing each week to the point where I'm almost happy with my trading plan. I would say I have an intuitive feel for what price will do but I'm not looking to be a discretionary trader, everything I do has to adhere to my plan 100%.
So what's my trading plan.......
I won't divulge everything in public because it has taken 10+ years of struggling through adversity and near death experiences in hospital to finally allow me to be at a point in my life where it feels like this is my time. Failure isn't an option. I will however talk about my Aha moments and how I think they arose because I believe in paying it forward, karma, whatever you want to call it. I've made so many deals with god in my past 20 years dealing with chronic pain, despite thinking I am agnostic and driven by logic, that I'm not going to risk being selfish. I don't even care about money - my plan is to make billions and give it all away.
Trading isn't about the love of making money, it's about playing the game. Money just helps us all keep score (Paraphrasing terribly I'm sure!)
So some Aha moments.... (Most of these are observations about NQ/YM/ES/FDAX/GC with a view to being out before the market close)
Obviously being a price action only trader I've spent a lot of time observing breakouts, support, and resistance. I don't really know any price or candlestick patterns and whatnot as I've not a read a book about trading since deciding to try and solve this game on my own a decade ago. I do like to read journals from other struggling traders just to see why they fail, rather than trying to adopt their own theories; I also liked the market wizards books when I last read them back in 2004.
So when I thought about support and resistance I tried to deduce logically how these levels were any different to an indicator in their lagging nature but they all seemed the same to me. I don't doubt for a minute that many traders make lots of money using these things but they can't be 100% reliable with tiny risk. Indicators obviously are less reliable than S/R levels in terms of creating a great R:R, but S/R levels are so obvious to the big guys that they will unavoidably get spooked and faded and have all sorts of games being played around these levels preventing the use of minimal stops.
Perhaps there are some traders that can analyse order flow so well that they know a level will hold or break, but they still need to leave quite a bit of wiggle room for stop hunting and the other ways that these levels get played with before holding/breaking. Needing even more room for error if trading the break out from these levels as opposed to the reversal due to slippage, volatility etc.
Given this information I decided that logically these levels are just too static in their nature to provide entry points where you can consistently be right whilst risking just a few ticks.
So now my observations focused on ways to enter the market at dynamic points where very few people are observing, and price would immediately move enough for me to move my stop to break even, without missing the majority of a move by getting chopped out at break even, or the market being so volatile that slippage becomes an issue.
A little bit off topic here. Why do I keep hearing people say entries aren't as important as trade management? This just doesn't make any logical sense to me when I try to fit that theory into what I have learnt about probabilities and risk/reward, and their affect on your ability to compound an edge, when studying poker theory and basic statistics. (BTW my end goal would be to compound my edge to a point where the size I'm trading would require an extremely liquid market like the ES or much larger time scales/currencies)
I guess this entries not being as important idea could get thrown around a lot because the majority of traders don't have the time to develop a complete entry strategy focused on achieving the absolute minimal risk possible, and you can still make money with fuzzy entries and great trade management. I dunno really, why wouldn't you want both???
How far do I need price to immediately move before putting a stop at net break even without getting chopped out of the move, but still leaving enough room to cover the spread and comms with a reasonable R:R?
4 ticks? Not enough as after covering costs this is really only 1 tick wiggle room to avoid the chop.
6, 8, 10 ticks?
In the markets I observe, with retail costs, and market orders, this probably needs to be about 8+ ticks to allow a few ticks wiggle room whilst still getting out at BE net of costs. I considered scaling in and out as an option but if you can find points where price will reverse with high accuracy, and immediately move in your favour, then scaling just seems to worsen your R:R for no reason.
I came to the conclusion that I'd probably need to be looking for entry points where price was likely to immediately reverse to allow tiny stops, but would also move with enough momentum to allow me to cut my risk to break even asap without the issue of chop, and still catching large moves. (I ruled out trading breakouts due to likely slippage and difficulty of back testing accurately over a huge sample size, whereas reversal/retracement points in back testing and practice are more likely to be accurate and not affected by volatility induced slippage)
Now I know what I'm looking for is what most other traders don't see, easy right....
Each of the paragraphs above cover many many hours, days, weeks, months using back testing trying to find the next logical step, and each had their own Aha moments.
I did get to a point last year where back testing and realising I was wrong about a theory no longer caused me mental pain. I eventually enjoyed being proven wrong because I knew that every time I was wrong was an opportunity to find out why and potentially spot something that nobody else can see. I think this is why I love testing and don't care too much about trading right now - I've shown myself with a small account that I can be very profitable with minimal risk. But being profitable isn't what drives me, being right drives me, and the pursuit of perfection. Even with poker I spent countless more hours working on theory, and creating my own methods, than I did playing. I hate gambling, which is the inevitable destination if you want to be at the top in the current poker climate, but I loved the journey.
A little bit off track there again, but this blog is really for my benefit so I will wander off on different tangents.
Where was I. Trying to solve the unsolvable. Btw most of my observations are regarding day trading as I intend to take and destroy the TST combine soon to start my journey in live trading for a living, but I also test each idea on larger time scales knowing that ultimately if you want to make billions running a hedge fund, then it isn't going to be done day trading the emini's.
"looking for entry points where price was likely to immediately reverse to allow tiny stops, but would also move with enough momentum to allow me to cut my risk to net break even asap without the issue of chop, and still catching large moves"
Now what are some dynamic entry points where price reverses at a very high frequency? Fib levels, pivots, trendlines????
Daily Fib levels and pivots are very similar to S/R levels in that many people are looking at them. I did extensive testing using retracements to dynamically drawn fib levels after a strong price move and found some very profitable strategies, but also found that price would often move beyond these levels to a point of support/resistance or trendline further out.
This then made me think that I want to find a thrust in price that will retrace and reach the last possible sticking point before continuing the move. A retracement to a previous swing point would rarely happen on the strongest moves and is visible thus susceptible to being played, and could signal a lack of momentum,which I had already decided was required to enable my stop to be moved to break even quickly without getting chopped and missing the move.
It appeared as though retracements to the widest trendline would provide a point to get in with minimal risk, without sacrificing momentum. Trendlines however, similar to S/R levels are very easy to see, and therefore be liable to being spooked, if they are well defined with several tests. So I then thought that getting in at the first touch of a trendline would be a good option if I could confirm momentum somehow. The benefit of entering at the first touch of a newly forming trendline is that it is reasonably dynamic, whilst still providing a definite entry point where risk can be minimised if it holds.
The first touch of the trendline formed by a new 123 (I'm not sure if a 123 is what they're called, but basically I mean: Price thrusts, retraces, and then thrusts to a new high or low beyond the extreme of the original thrust), has the benefit of being the last sticking point before retracing to the retracement swing point of said 123. As I had observed that price retracing back through this newly formed trendline to the previous swing point could show a lack of momentum, it made sense that if I could define strong momentum, and price reached the newly formed trendline of the 123, there was a very high probability that this trendline would be an extremely strong sticking point.
That last paragraph is terribly written but it's tricky to describe a setup in words. So, if price breaks the described newly forming trendline of the 123 then momentum isn't strong enough. But if momentum were to be strong enough then the newly formed trendline would very likely hold, and should be dynamic enough to not warrant stop hunting and spooking by the big money. Add all those things together and I start to fulfil some of my checklist requirements:
- Dynamic but definable reversal entry point
- Unlikely to be spooked or watched by the majority
- Goes with the current momentum
- Provides an opportunity for a tiny stop but also a huge potential move
Now one big problem with just looking for this setup is that without defining strong momentum, the trendline often will not hold. The second big issue is that the entry point on this trendline from a 123 that starts a new trend will be counter to the existing trend, or will occur inside a range.
So how do we now define that the previous trend has run out of momentum, or that the trading range is set to break out, ensuring that we will have the requisite momentum on our side to ensure the setup holds, and price isn't going to just retrace through the entry trendline to the next logical sticking point???
This was the question that took the longest for me to answer out of all the observations I had ever made. It's basically asking when will a trend reverse before it shows obvious signs of reversing, or when will a range breakout before it breaks out? If the trend has already shown signs of reversing, or the range has broken out, then this entry setup doesn't exist.
So I know the first touch of a newly forming 123 trendline, in a new trend direction/inside a range, is the setup I am looking for to enter with minimal risk. But if you look at a chart it seems as though you can only see these entries long after they have happened and the new move is already on it's way.
If we were to enter on this setup on a trend that is already happening, then either there will be a wider trendline further out which could be the next logical sticking point, thus reducing the probability of ours holding. Or if our entry trendline does coincide with the widest trendline from the existing trend, then this line would be visible to all and liable to be spooked.
Seeing as both of these negative things are what I'm looking to avoid in my checklist for entering with the tiniest risk, it means we cannot enter with an existing trend that hasn't broken the widest trendline. Now if the existing trend breaks it's widest trendline and forms a range, then we could enter inside this range in the same direction of that previous trend.
You might then think, oh i'll just wait for a strong trend to break it's widest trendline, form a range, and then enter on the first touch of the first trendline formed by the 123 that breaks out of the range. The problem with this idea is that when the range of the existing trend breaks out, price will almost never retrace to the trendline of the 123 that formed during the breakout, because the momentum will be too strong, and the angle of said trendline too shallow.
Defining momentum before it happens.........
How do we do that? Maybe volume can give us a clue? Maybe we can define the strength of a trend by looking at the velocity/strength of the 123's that form it? Maybe the relative strength/velocity of our entry 123 can provide an answer? These were a few of the things that I tested to help me find my own answers.
Hopefully this won't be my first and last post of the past decade. When I get around to doing the TST combine I might journal my progress here if it's not too distracting. If not I'll pop back here when I've made my first billion. I don't talk with anyone about trading so it might be nice to find some people to share the journey with - I'm a bit of a crazy recluse though lol.
Time for me to go and do some back testing.
Good luck to you all,